The International Arbitration Review: Ecuador
Ecuador enacted the Mediation and Arbitration Act (Arbitration Act) in 1997. Since then, the main amendments were introduced by the new Procedural Code promulgated on 22 May 2015 that came into force on 22 May 2016 (Procedural Code). Ecuador was one of the signatories of the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards of 1958, which has been in force in Ecuador since 29 December 1961 following approval by the Senate and the ratification of the President of the Republic that confirmed the reservation made by Ecuador when signing the Convention, in the sense that only arbitrations related to commercial matters, as considered by Ecuadorian legislation, will be recognised and enforced in Ecuador. Ecuador is also member of the Inter-American Convention on International Commercial Arbitration of Panama of 1975, as well as of the Inter-American Convention on Extraterritorial Validity of Foreign Sentences and Arbitration Awards of Montevideo of 1979.
The Arbitration Act regulates both domestic and international arbitrations, as well as mediation. It provides for ad hoc arbitration and administered arbitration through arbitration institutions that may be established by not-for-profit organisations that originally were registered by the Ecuadorian Federation of Commercial Chambers, but that according to the Procedural Code are now registered with the Council of the Judiciary. The latter is the entity that regulates judges, and it has issued regulations to extend its control to cover arbitration institutions according to the theory that arbitration is not an alternative method for dispute resolution, as provided by the Constitution, but a jurisdictional lawsuit.
The main arbitration institutions were established by different chambers of commerce, including binational chambers of commerce (those established to promote commerce between Ecuador and specific other countries), in different cities of Ecuador. The main arbitration centres were created by the Chamber of Commerce of Quito, the Chamber of Commerce of Guayaquil, the Chambers of Production of the province of Azuay, the National Chamber of Construction and the Ecuadorian–American Chamber of Commerce. Each one has proper regulations for the conduct of arbitration. The Ecuadorian–American Chamber of Commerce Arbitration Centre is empowered to hold arbitrations under the Inter-American Convention on International Commercial Arbitration, and in 2017 the International Chamber of Commerce of Paris appointed the Centre of Arbitration of the Chamber of Commerce of Quito as its representative in Ecuador.
Arbitration awards may be annulled by the president of the provincial court of the seat of the arbitration. No appeal or cassation is available from such decision. The Constitutional Court originally upheld that constitutional control is not applicable to arbitrations, but has changed its position, accepting that actions for extraordinary protection may be brought either against the decision of the president of a provincial court or directly against an award, in the case of a violation of constitutional rights or human rights protected under international instruments on a matter.
Owing to a lack of confidence in the judicial system, originally as a result of interference by the legislative and the executive powers in the judiciary in December 2004, and later as a consequence of the totalitarian appointment of judges by the Council of the Judiciary, which was conducted under the theory that the state should control all private activities, arbitration is slowly increasing as an alternative method for resolving private disputes, especially in the city of Quito. However, governmental institutions have continually refused to submit disputes to arbitration, accepting the presidential objection of considering it an invalid method for dispute resolution owing to the view that only the state has the power to decide on public matters. The denunciation on 7 July 2009, with effect from 7 January 2010, of the ICSID Convention, ratified by Ecuador in 1985, and of all international bilateral treaties on international investments entered by Ecuador since 1965, were based on this presidential approach.
Legislation enacted on 21 August 2018 that was aimed, among other objectives, at attracting foreign investment,2 established the obligation of submitting to arbitration, either domestic or international, in investment contracts between Ecuador and foreign investors, the controversies derived from such contracts. There is no obligation for foreign investors to enter into such investment contracts.
The year in review
i Domestic and international arbitration developments
The Procedural Code enacted on 22 May 2015 established the steps and the formal requirements for the recognition or homologation of foreign awards by the competent chamber of the Provincial Court where an award is to be enforced. This homologation process was eliminated by the above-mentioned Law of 21 August 2018, which reestablished the original provision of the Arbitration Act ordering that awards issued in international arbitration proceedings are enforced in Ecuador in the same way as domestic awards, which enforcement starts with an order of enforcement issued by a trial judge against which, under the Arbitration Act, all defences generated after the issuance of awards may be opposed, while under the Procedural Code, only defences connected with the extinction of obligations, with the exception of prescription or a statute of limitations, may be argued. However, the Procedural Code has maintained the principle that foreign awards are tithes for execution only if they are homologated in Ecuador, a provision that was confirmed by a new Law amending the Procedural Code promulgated on 26 June 2019. Based on this legal provision, and invoking also the principle that Ecuadorian courts should confirm that such foreign awards have the effect of res judicata and do not violate the Ecuadorian public order, the Court of Appeals of Quito confirmed a decision of a trial judge that rejected the enforcement of a non-homologated award.3 Consequently, under these provisions and interpretations, before requesting the enforcement, an action, in ordinary proceedings, should be brought to have foreign awards recognised and homologated. An action to obtain a declaratory judgment of unenforceability of a foreign award alleged to be contrary to the public law of Ecuador is still pending in a cassation appeal.
Provisional measures under the Procedural Code that international investment arbitrations should be enforced by trial judges, confirmed in a partial final award, were set aside by former judges of the Constitutional Court. In the case, the Constitutional Court ordered the trial judge not to enforce provisional measures that ordered a stay of the enforcement of a domestic sentence. It further stated that the decision issued by associate judges of the National Court of Justice, acting under the instructions contained in a second decision of the Constitutional Court issued in a second action for extraordinary protection, in a case derived from the decision of the plaintiff to not buy an industrial plant worth US$1.5 million, should instead be fulfilled, contradicting the international arbitration award that declared that the investor involved had been denied justice as a result of a decision establishing damages of US$42 million.4 All the judges of the Constitutional Court that ordered the enforcement of the judicial decision in spite of the provisional measure were dismissed by the Council of Citizenship Participation and Social Control on the basis of bias and corruption. This case was mentioned as one of the bases for such dismissal.5
ii Investor–state disputes
According to information provided by the Attorney General of Ecuador in his report for 2019, eight investment arbitrations brought against Ecuador are pending. To date, Ecuador has generally fulfilled previous arbitration awards on foreign investment disputes without the need for enforcement procedures.6
During the 10-year tenure of former President Rafael Correa (15 January 2007 to 24 May 2017) the ICSID Convention, in force in Ecuador since 1985, was denounced as well as all the bilateral investment treaties that Ecuador had entered since 1965. Some of these treaties will survive the denunciations for about 10 years for foreign investments with respect to existing investments. The new government, inaugurated on 24 May 2017 under President Lenín Moreno, announced new negotiations to enter into new bilateral investment treaties. It has been announced that negotiations have started with the European Union and several countries including the United Kingdom, the United States, Mexico, Japan and South Korea. An investment treaty with the European Trade Association has been signed.
Outlook and conclusions
The Council of the Judiciary's scrutiny and control is affecting institutional arbitration.
Although the number of international arbitration cases is slowly increasing, there is no clear indication what enforcement trend judges will follow in the different jurisdictions of Ecuador. As previously explained, under the Arbitration Act, requests for the enforcement of foreign arbitration awards should be made directly to trial judges who have the power to decide on the defences, including any violation of Ecuador's reservation to the New York Convention and of the provisions of Article V of the Convention, including any eventual violation of the public policy of Ecuador. No clear definition of the competence of judges on this matter has been determined up to now. Since the whole judicial system has been frequently changed by the Council of the Judiciary, judges do not have adequate knowledge of the matter. In addition to this lack of knowledge of the law or, in other words, legal ignorance, corruption is also a hindrance.
A movement to prepare, discuss, draft and submit a new bill to enact a new arbitration law under the guidelines of the UNCITRAL Model Law is slowly growing, but the attitude and political orientation of both the members of the Council of the Judiciary and the National Assembly (which replaced Congress on 20 October 2008) has to be defeated in order to obtain such objective. Public institutions under the control of anti-democratic doctrines have to be reshaped to reestablish the rule of law. Unfortunately, recent instances of the Council of the judiciary intervening, without any authority, in arbitrations institutions has evidenced that the trend against alternative dispute resolutions, started in 2007, is still a public policy.
1 Alejandro Ponce Martínez is a senior partner at Quevedo & Ponce.
2 Organic Law for productive development, attraction of investments, generation of employment, stability and fiscal equilibrium.
3 CW Travel Holdings NV v. Seitur Cia Ltda, 30 September 2019.
4 Local case, Prophar SA v. Merck Sharp & Dohme (Inter American) Corp; foreign investment arbitration, Merck & Co Inc v. Republic of Ecuador.
5 Decision of 23 August 2018.
6 In the final award in Merck & Co Inc v. Ecuador, dated 5 March 2020, under the UNCITRAL Rules, for denial of justice in the domestic case brought by Prophar SA, the respondent was ordered to indemnify the claimant in an amount of US$44 million.